Leggett & Platt, Incorporated (NYSE:LEG) shares are down more than -2.80% this year and recently decreased -2.72% or -$1.29 to settle at $46.22. American Woodmark Corporation (NASDAQ:AMWD), on the other hand, is up 66.25% year to date as of 12/05/2017. It currently trades at $119.00 and has returned 28.70% during the past week.
Leggett & Platt, Incorporated (NYSE:LEG) and American Woodmark Corporation (NASDAQ:AMWD) are the two most active stocks in the Home Furnishings & Fixtures industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LEG to grow earnings at a 0.60% annual rate over the next 5 years. Comparatively, AMWD is expected to grow at a 8.00% annual rate. All else equal, AMWD’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 12.53% for American Woodmark Corporation (AMWD). LEG’s ROI is 19.40% while AMWD has a ROI of 19.10%. The interpretation is that LEG’s business generates a higher return on investment than AMWD’s.
The value of a stock is simply the present value of its future free cash flows. LEG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.13. Comparatively, AMWD’s free cash flow per share was -. On a percent-of-sales basis, LEG’s free cash flow was 0.46% while AMWD converted 0% of its revenues into cash flow. This means that, for a given level of sales, LEG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. LEG has a current ratio of 1.70 compared to 3.50 for AMWD. This means that AMWD can more easily cover its most immediate liabilities over the next twelve months. LEG’s debt-to-equity ratio is 1.02 versus a D/E of 0.05 for AMWD. LEG is therefore the more solvent of the two companies, and has lower financial risk.
LEG trades at a forward P/E of 17.31, a P/B of 5.50, and a P/S of 1.62, compared to a forward P/E of 23.34, a P/B of 5.47, and a P/S of 1.89 for AMWD. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. LEG is currently priced at a -15.3% to its one-year price target of 54.57. Comparatively, AMWD is 10.19% relative to its price target of 108.00. This suggests that LEG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for LEG and 2.00 for AMWD, which implies that analysts are more bullish on the outlook for LEG.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. LEG has a beta of 1.05 and AMWD’s beta is 1.56. LEG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. LEG has a short ratio of 6.65 compared to a short interest of 2.36 for AMWD. This implies that the market is currently less bearish on the outlook for AMWD.
Leggett & Platt, Incorporated (NYSE:LEG) beats American Woodmark Corporation (NASDAQ:AMWD) on a total of 8 of the 14 factors compared between the two stocks. LEG is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, LEG is the cheaper of the two stocks on an earnings and sales basis, LEG is more undervalued relative to its price target. Finally, FBHS has better sentiment signals based on short interest.